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total costs associated with the sale of the product (TR=TC). [1]A break-even point is
typically calculated in order for businesses to determine if it would be profitable to sell a
proposed product, as opposed to attempting to modify an existing product instead so it
can be made lucrative. Break-Even Analysis can also be used to analyse the potential
profitability of an expenditure in a sales-based business.
Contents
[hide]
• 1 Margin of Safety
• 2 In unit sales
• 3 In Capital budgeting
• 4 Internet research
• 5 Limitations
• 6 References
• 7 Bibliography
• 8 External links
An example:
The break even analysis results can be used to decide abandon of the project if forecasts
show that below break even values are likely to occur.
In using Break even analysis, it is important to remember the problem associated with
Sensitivity analysis as well as some extension specific to the method:
To make the results clearer, they can be graphed. To do this, you draw the total cost curve
(TC in the diagram) which shows the total cost associated with each possible level of
output, the fixed cost curve (FC) which shows the costs that do not vary with output
level, and finally the various total revenue lines (R1, R2, and R3) which show the total
amount of revenue received at each output level, given the price you will be charging.
The break even points (A,B,C) are the points of intersection between the total cost curve
(TC) and a total revenue curve (R1, R2, or R3). The break even quantity at each selling
price can be read off the horizontal, axis and the break even price at each selling price can
be read off the vertical axis. The total cost, total revenue, and fixed cost curves can each
be constructed with simple formulae. For example, the total revenue curve is simply the
product of selling price times quantity for each output quantity. The data used in these
formulae come either from accounting records or from various estimation techniques
such as regression analysis.
[edit] Limitations
* == Break-even analysis is only a supply side (ie.: costs only) analysis, as it tells you
nothing about what sales are actually likely to be for the product at these various prices.
When dealing with a make vs. buy decision, there are four numbers you need to know:
1. Your volume
2. The fixed costs associated with making (e.g., the tooling that must be bought)
3. The per-unit direct costs of making
4. The per-unit landed cost from a supplier
Where,
V = Volume
If CTM exceeds CTB, then it is more financially desirable to buy. If CTB exceeds CTM,
the opposite is true. Practice by using the Excel template at
http://www.NextLevelPurchasing.com/make.xls .
When dealing with a make vs. buy decision, there are four numbers you need to know:
1. Your volume
2. The fixed costs associated with making (e.g., the tooling that must be bought)
3. The per-unit direct costs of making
4. The per-unit landed cost from a supplier
V = Volume
If CTM exceeds CTB, then it is more financially desirable to buy. If CTB exceeds CTM,
the opposite is true. Practice by using the Excel template at
http://www.NextLevelPurchasing.com/make.xls .
PLANT LOCATION
Qualitative Factors
1. Local infrastructure
Quantitative Factors
1. Labor cost
2. Distribution
3. Facility costs
4. Exchange rates
Cincinnati 400
Knoxville 300
Chicago 200
Pittsburgh 100
Atlanta 100
Formula:
B. Factor Rating
3. Develop scale
4. Have management score each location
PLANT LOCATION
Qualitative Factors
1. Local infrastructure
Quantitative Factors
1. Labor cost
2. Distribution
3. Facility costs
4. Exchange rates
Cincinnati 400
Knoxville 300
Chicago 200
Pittsburgh 100
Atlanta 100
Formula:
B. Factor Rating
3. Develop scale